ChartWatch: Iron Ore vs BHP, RIO & FMG, Copper vs SFR, Nickel vs IGO & NIC, Lithium vs PLS & MIN

In the last ChartWatch, I investigated the key Chinese stock and property indices you can use to track the health of the Chinese economy. Unfortunately for the Chinese, and by extension, Australian resources stocks investors, that health is waning. In fact, looking at the charts in the last article, you’d say the patient in question is very sick indeed!

In today’s ChartWatch, I note the sharp pullback in resources stocks since the start of the year. This makes today’s review of major commodities charts and the ASX resources companies producing them very timely. Let’s dive in!

Iron Ore vs BHP Group (BHP), Rio Tinto (RIO) & Fortescue (FMG)

Iron Ore Shanghai (DCE May 2024 futures)

Dalian Commodities Exchange (DCE) Iron Ore, benchmark May 2024 contract needs a bounce here, or else!

ST/LT Trends:⬆️/⬆️

Price Action:📈

Candles:⬛

View: Iron ore prices have pulled back from their seasonal run in November and December. Whilst seasonally January and February are also typically sound months for iron ore, it is fair to say the bulk of the seasonal rally is likely done, and therefore the price is more prone to pullbacks within the broader uptrend.

It certainly appears to be the best explanation of what’s happening to the iron ore price now. The current pullback has broken below the short-term uptrend ribbon which has switched to neutral. The point of demand at 915 appears to be holding, and it’s still worth trusting the prevailing long-term trend while higher peaks and higher troughs are intact.

Even so, I’d still be watching closely for either a break of 915 to signal this is more than just a pullback, or a lower peak set below the now-key point of supply at 1026. A lower peak would be even more indicative of a changing short-term trend if it is punctuated with supply-side candles.

To resume the short-term uptrend, we would need to see a resumption of higher troughs and then higher peaks (i.e., a close above 1026) punctuated with demand-side candles. In summary, the iron ore price is at a critical juncture.

BHP Group (BHP)

BHP now trading is at a crucial dynamic technical support zone

ST/LT Trends:➡️/⬆️

Price Action:📉

Candles:⬛

View: BHP’s price has overshot the iron ore price, possibly because of its exposure to copper (24% of underlying profits) and to a lesser extent, nickel (0.6% of underlying profits).

A-shaped reversals are the nightmares of trend followers, and I would have said BHP was nothing but “a picture of excess demand” at its recent high of $50.84. Supply-side candles provided decisive warning signals that something wasn’t completely right with the short-term uptrend, though.

This is a key level for BHP. The dynamic support zone of the long-term trend ribbon must hold to stave off further declines to major support around $43. Watch for the appearance of demand side candles to signal short-term supply is backing off – but not until these turn into higher peaks and higher troughs to signal a sustainable low is in.

Rio Tinto (RIO)

Rio Tinto’s techncials are better than BHP’s, but still have some work to do to reassert the short term uptrend

ST/LT Trends:➡️/⬆️

Price Action:📉

Candles:⬛

View: RIO’s pullback hasn’t been as severe as BHP’s and this is a great example of relative strength within a sector. Many traders argue it's good practice to identify and stick with the strongest stock in a sector.

Looking forward, it’s very much the same narrative as BHP. Demand-side candles must yield a resumption of higher peaks and higher troughs to signal a meaningful short-term low is in. This would also resume what is shaping as a very solid long term uptrend.

RIO appears to be trying to hold the demand zone above $123.60. A close below $123.60 would likely see a move lower to test the dynamic support of the long-term uptrend ribbon around $119 - $122.

Fortescue (FMG)

Fortescue has the best technicals of the major ASX iron ore stocks

ST/LT Trends:➡️/⬆️

Price Action:📉

Candles:⬜⬛

View: From a purely technical perspective, FMG is the pick of the ASX iron ore majors. It has experienced the shallowest move below its short-term trend ribbon, actually sneaking back above it in today’s trading session. Yesterday’s full white demand-side candle is a further sign of buy-the-dip activity.

As long as $26.46 holds, I suggest the short-term trend is intact. A close above the all-time high of $29.46 would signal excess demand has returned in force. Outside of these parameters, the long term uptrend is chugging along nicely.

Copper vs Sandfire Resources (SFR)

Copper (London Metals Exchange)

LME copper needs to hold an important technical level or it risks a sharper decline

ST/LT Trends:➡️/⬇️

Price Action:📉

View: Last night on the LME, copper closed below the key major point of demand at 8205. This now likely paves the way for deeper retracements of the October to December rally, potentially to the next major point of demand at 8006.

With the short-term trend well and truly rolling over, and the price once again below the long-term downtrend ribbon, there’s little to indicate an environment of excess demand here. In fact, it’s most likely the exact opposite.

Sandfire Resources (SFR)

Sandfire Resources needs to hold key technical support levels

ST/LT Trends:➡️/⬆️

Price Action:📉

Candles:⬜⬛

View: “Sideways” is probably the best way to describe the SFR chart. But this would be a major disappointment for SFR shareholders who, just a couple of weeks ago, were probably thinking about the prospect of a major breakout from the impressive basing pattern formed for most of 2023.

The price action and candles remain mixed, and a return to demand-side candles and higher peaks and higher troughs are required to confirm excess demand has returned in the short term.

Like many of the charts shown here today, support needs to hold or deeper falls are the risk. A close below the long term trend ribbon would be a sign of particularly weak demand and ominously building excess supply.

Nickel vs IGO & Nickel Industries (NIC)

Nickel

This is the worst chart from a demand perspective so far, but wait, there are more charts to come!

ST/LT Trends:⬇️/⬇️

Price Action:📉

View: No need to spend too long on this chart. It is a picture of excess supply. Worse, it’s potentially about to break another key demand point in 15705. The next major demand point on the weekly chart (not shown) is at the September 2020 low of 14179.

IGO

Ok, now IGO is officially the worst chart in this list!

ST/LT Trends:⬇️/⬇️

Price Action:📉

Candles:⬛

View: This is the quintessential metals chart. 1. Boom. 2. Bust. IGO’s two main businesses are nickel and lithium (lithium minerals charts are shown below). Enough said.

This chart is an excellent lesson in having a technical backstop to any fundamental narrative you may have been fixated upon when you originally bought into a stock.

IGO’s chart is a picture of excess demand, and it has been for some time. Disturbingly, there’s nothing in the chart in the ways of demand-side representation to suggest the prevailing short and long-term trends are about to end anytime soon.

The only saving grace for IGO owners is, as a trend follower, my methodology is always wrong at the top and the bottom of a big trend. Let’s hope this is the case, and somehow, IGO is smack bang at its bottom right now!

Nickel Industries (NIC)

Ok, this is getting ridiculous, surely the charts in today’s ChartWatch can’t get any worse

ST/LT Trends:⬇️/⬇️

Price Action:📉

Candles:⬛

View: Again, probably little commentary is required here – well at least from a trend follower’s perspective. I will leave it to those otherwise inclined to debate the fundamental value potentially inherent in such a chart. But I remind anyone analysing NIC to keep in mind this chart is a clear indication of demand-side abstention (i.e., those looking to allocate cash at the best possible risk-adjusted return are looking elsewhere), and highly motivated supply (i.e., those who currently own NIC stock are bailing out in droves – at just about any price!).

Lithium vs Pilbara Minerals (PLS) & Mineral Resources (MIN)

Lithium Carbonate (GFEX July 2024 futures)

The benchmark July contract for GFEX lithium carbonate is trading in an increasingly tight range

The very definition of a well established short term downtrend

ST/LT Trends:⬇️/⬇️

Price Action:📉

View: Doubling up lithium carbonate futures and the spodumene index here because, let’s face it, they tell a very similar story. Lithium carbonate futures is the closer of the two to potentially reverse the short-term trend. Here, I would watch very closely for a close above the 2 January high of RMB 110300, a positive sign, and a close above the 11 December high of RMB 113800, which I believe would commence a new short-term uptrend.

Pilbara Minerals (PLS)

Pilbara Minerals has fared better than your average lithium stock, but still looks under steady selling pressure

ST/LT Trends:⬇️/⬇️

Price Action:📉

Candles:⬛

View: PLS has fared better than your average lithium stock, but its chart still looks like one that is consistent with steady excess supply. Watch my long term downtrend ribbon here – it’s notorious for killing short-term rallies within a long term downtrend – as it did with that December rally to $4.01.

So much needs to occur in this chart to signal excess demand has returned – and perhaps even that those pesky short sellers are beginning to exit their famous trade. Demand-side candles, higher peaks and higher troughs, and a close above the short-term downtrend ribbon would be great for starters. But ultimately, it will be a close above the long term downtrend ribbon which likely signals the next PLS bull market has begun.

There’s a minor point of demand at $3.43 which is so far holding (yesterday’s close was $3.46). A close below here could open up a completion of the retracement to the major point of demand at $3.10.

Mineral Resources (MIN)

Is Mineral Resources an iron ore stock or a lithium stock? Probably doesn’t matter either way right now because both are struggling

ST/LT Trends:⬇️/⬇️

Price Action:📉

Candles:⬛

View: MIN’s chart is stuck somewhere between the half-decent uptrend in iron ore and the horrendous downtrend in lithium minerals. Either way, it’s hardly a picture of excess demand. As a trend follower, it’s hard to get excited about coincident short and long-term downtrends, poor price action, and predominantly supply-side candles.

Whilst I might not be doing the hours of research to understand the true fundamental value of MIN, I assure you those who created the chart above have. Until they start printing demand side candles and higher peaks and higher troughs, I prefer to maintain a dim view of MINs prospects.

My view will grow even dimmer should MIN close below the major point of demand at $56.20. The next major point of demand below here is a very frightening $42.75 set at the July 2022 low on the weekly chart (not shown).

Carl’s Technical Analysis Methodology Key

Trends (ST Trend ribbon: 21 & 34 EMAs || LT Trend ribbon: 144 & 233 EMAs)

⬆️ = Uptrend, the ribbon is rising indicating a higher probability the market is in a general state of excess demand

⬇️= Downtrend, the ribbon is declining indicating a higher probability the market is in a general state of excess supply

➡️ = No trend, the ribbon is flattening indicating a higher probability the market is in equilibrium

Price Action

📈 = Rising peaks and rising troughs indicating buy-the-dip activity and supply removal (i.e., indicating a higher probability market is in a general state of excess demand)

📉 = Falling peaks and falling troughs indicating sell the rally activity and demand removal (i.e., indicating a higher probability market is in a general state of excess supply)

⬅️➡️ = Neither of the above scenarios, market price action is indecisive

Candles

⬜ = Predominantly demand-side candles in the recent past, i.e., white bodies and or downward-pointing shadows (i.e., indicating a higher probability market is in a general state of excess demand)

⬛ = Predominantly supply-side candles in the recent past, i.e., black bodies and or upward-pointing shadows (i.e., indicating a higher probability market is in a general state of excess supply)

⬜⬛ = Mixed, i.e., indicating no discernible trend towards demand-side or supply-side candles in the recent past